Forex glossary
Value at Risk (VaR)
VaR is a loss threshold for a stated horizon and confidence level within a model or sample. A one-day 95% VaR of 1,000 PLN implies about 5% modeled probability of exceeding that threshold. It is not a maximum loss or a guarantee of future frequencies and does not describe losses beyond it.
Illustrative example
How does it work in practice?
In a hypothetical model, one-day 95% VaR is 1,000 PLN. About 5% of modeled scenarios can exceed that threshold; a 3,000 PLN loss does not contradict the definition or breach a guaranteed loss cap.
A case to work through
Incompatible reports
Model: A reports one-day 95% VaR of 500 USD; B reports weekly 99% VaR of 700 USD.
- Both horizon and confidence level differ.
- B’s larger amount alone does not establish greater risk under matched assumptions.
What follows? Align model, horizon and confidence before comparison.
Example boundary: Do not rescale thresholds without justified distribution assumptions.
A useful distinction
Value at Risk (VaR) / Conditional Value at Risk (CVaR)
CVaR describes a specified tail’s mean; VaR identifies a quantile threshold.
Check your understanding
Check horizon and confidence before comparing thresholds.
Show the answer and explanation
Horizon, confidence level and model
These define the threshold’s interpretation.
Net results and risk measures
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Related terms
Sources and documentation
- BIS MAR10: market risk terminology
VaR at a stated horizon/confidence and expected shortfall as a tail mean.
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